Europe’s central bank just fired the “bazooka.”
Dispatch readers know governments have been using extremely reckless monetary policies since the 2008 financial crisis. In an effort to stimulate their economies, they’ve borrowed and printed incredible sums of money. For example, the Federal Reserve has created 3.5 trillion new currency units since 2008. The Fed has also held interest rates at unnaturally low levels. This has made it extremely cheap to borrow money.
• The European Central Bank (ECB) cut its key interest rate on Thursday...
Its key rate is now negative 0.4%.
Negative rates don’t make sense to most people. Normally, a bank pays you interest on money you keep in the bank. With negative rates, you pay to keep money at the bank.
It amounts to a tax on your cash. It’s a bizarre policy that could only exist in a world run by idiot politicians.
• The government hopes negative rates will get people to spend more money...
The idea is that you’ll buy more cars, televisions, and shoes. This will make the economy grow. But Casey Research founder Doug Casey explains that’s not how the real world works.
It’s part of the Keynesian view, in which spending and consumption drive the economy. This isn’t just wrong, it’s the exact opposite of what’s true. It’s production and saving that drive an economy. You have to save to build capital, and capital is necessary for…everything. What these people are doing is destructive of civilization itself. And when we go into the next crisis, governments will use the disastrous results of their own policies as excuses to enact even more destructive versions of the same things.
• The ECB also expanded its quantitative easing (QE) program...
QE is when a central bank creates money and pumps it into the financial system. It’s a euphemism for money printing.
The ECB is now creating €80 billion ($89 billion) every month. It’s by far the biggest money printing program in Europe’s history.
• The ECB’s reckless monetary policies have failed to help economic growth…
Europe’s economy is barely growing. However, instead of changing course, the ECB is doubling down on its failed policies. Doug Casey warned about this last month…
The economy of the European Union is a constipated, sclerotic, malfunctioning entity that only registered real economic growth of 0.2% in the recent quarter—assuming you can credit their numbers at all. The continent is a giant monument to socialism, where everyone believes they can live at the expense of everyone else. As a result, the average European sees his government as a magic cornucopia, a source of unlimited wealth. When something goes wrong, Europeans look to their governments to “do something.” With this in mind, European Central Bank president Mario Draghi made the front pages by saying he is “ready to act” with a “whole menu of monetary policy instruments.”
• The STOXX Europe 600, which tracks 600 large European stocks, fell 1.6% on the news...
Typically, a huge dose of new money would cause markets to rally. But Europe is addicted to easy money. Markets were hoping for an even bigger dose of stimulus than the ECB delivered. Markets were disappointed that the ECB committed to print “only” $89 billion per month.
And Europe isn’t the only economy addicted to easy money. As we mentioned earlier, the Fed has pumped 3.5 trillion new dollars into the U.S. financial system since 2008. But the U.S. economy is growing at its slowest pace since World War II.
The Bank of Japan (BOJ) has more than doubled Japan’s money supply since 2013. It introduced negative rates in January. But Japan’s economy hasn’t grown in more than two decades.
• Easy money policies have accomplished one thing…
They’ve inflated asset prices to crazy levels. The S&P 500, the most watched stock index in the world, has surged 215% since March 2009. The Nikkei 225 has jumped 104% since Japan began its latest easy money program in 2012.
Bonds, commercial property, and art prices have all hit record highs. Yet world economies are barely growing. We’re living in an “Alice in Wonderland” economy where asset prices are disconnected from the “real economy.”
• Negative interest rates are likely coming to the U.S...
Today, the Fed’s key rate is 0.38%...well below its historic average of 5%. Federal Reserve chair Janet Yellen has already said negative rates are “on the table” if the U.S. economy slows. As we explained, negative rates are supposed to get people to spend more money. If you have to pay to save money at the bank, you’re more likely to spend.
However, there’s a major problem. Instead of paying negative interest rates, many Americans will simply pull their cash out of the bank. They’ll keep paper cash at home, where the government can’t tax it with negative interest rates.
• That’s why governments want all your money in the digital financial system...
Italy, Spain, Mexico, and Russia have already banned large cash transactions. The ECB is trying to get rid of the €500 bill. Lawrence Summers, the former U.S. Treasury Secretary, wants the U.S. government to pull the $100 bill out of circulation.
By banning cash, governments hope to force you to keep money in the digital banking system. And if your money is trapped in the digital banking system, you can’t escape the bank account tax that’s coming. The government will be free to tax your cash with negative interest rates.
• We expect the combination of negative interest rates and the ban on cash to create a huge rush into “underground currencies”…
Gold is the ultimate underground currency. As Casey readers know, gold has been used as money for thousands of years because it is easily divisible, easily transportable, has intrinsic value, is durable, and has consistent form around the world.
And, as Doug Casey reminds us, it's a good form of money because governments can’t print it on a whim. The government can’t destroy the value of your gold.
• The price of gold is up 18% this year...
It’s off to its best start since 1980, according to Financial Times. As governments get more desperate, gold should surge much higher. It could easily double or triple in the next few years.
If you don’t own gold, we recommend buying some today. If you already own gold, we recommend buying more.
We also encourage you to read our new report, “How to Protect Yourself from the War on Cash.” In it, we share our best advice on how to deal with negative interest rates and the coming cash ban. We explain seven steps you can take right now to protect your money. These things are easy to do, but you’ve likely never thought of some of them. Click here to claim your copy now.
Chart of the Day
Here’s proof that we’re living in an “Alice in Wonderland” economy.
Today’s chart shows the value of government bonds with negative interest rates.
Not long ago, negative rates were unheard of. Today, more than $6.6 trillion worth of government bonds now have negative rates. The value of government bonds with negative rates is almost seven times higher than it was last year.
Negative interest rates are a perversion of capitalism. They penalize people for working hard and saving money. We recommend taking steps to protect yourself before negative rates reach into your bank account.
Delray Beach, Florida
March 14, 2016
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